UPDATE: Taxation Laws Amendment Act 2010
Even though the new taxation changes have already come into effect (1 January 2011), there is still confusion and uncertainty regarding the interpretation and implementation of these changes.
To recap, the changes made by the National Treasury relate to Section 11(w) of the Income Tax Act as well as to the definition of gross income. These sections and definitions may affect:
· The deductibility of premiums from taxable income, and
· The taxation of the proceeds of the policy when it pays out.
ASISA, the National Treasury and SARS have met and corresponded since November last year on the problems associated with implementing some of these changes to the income tax legislation.
What were the changes again?
Prior to the changes, when premiums were paid by an employer for a key-man policy, the premiums were tax deductible if the policy met certain conditions that made it a conforming policy. In many instances, however, it was preferable that the policy was considered non-conforming and therefore the premiums were not tax deductible and the proceeds not taxable. Certain policyholder selected features (e.g. allowing the substitution of lives) of policy would cause a policy to be non-conforming.
The changes to section 11(w) of the Income Tax Act were to the rules on whether premiums for employer-owned policies were deductible from taxable income. The new rules to qualify for deduction are:
· only if the policy protects the company against any loss due to death, disablement or critical illness on the life of an employee or director, and
· the policy is a risk policy with no cash or surrender value, and
· the policy is not the property of anyone other than the company at the time of paying the premium, and
· no amount under the policy will be paid over by the company to an employee/director/ connected person in relation to that employee/director, the estate of that person or any other person that is dependent on that employee or director.
This means that the change will do away with the conforming and non-conforming status of a policy and a policy’s premiums will now be either deductible in terms of section 11(w)(ii) or not deductible. Where the premium is tax deductible the proceeds will be part of the gross income of the employer for income tax purposes.
Since this change applies to all policies, not just new policies, the status of an inforce policy may change and have significant consequences for the employer who had planned to receive a tax free amount on the death of an employee as he now has to pay tax on the proceeds. In some instances it may be possible to increase the sum assured to compensate for this tax. The cost to the employer will however be greater (the life assured is now older or may have suffered a health event) or the increase in cover may not be available.
Important: What are the latest developments?
SARS does not support the artificial alteration of a policy to cause that policy to retain its non-tax deductible status. One of the methods suggested by some insurers to maintain the non-tax deductible status is to add a small cash value to the policy – and it seems SARS has directed their comment at this proposed practice.
SARS, in a letter to ASISA dated 18 February 2011, has given some clarity but other issues remain unresolved. According to the letter, SARS will propose an alteration to the Income Tax Act to preserve the non-tax deductible status of previously non-conforming policies entered into before 1 January 2011. Further discussion is required to deal with policies:
· entered into on or after 1 January 2011, and
· those entered into before 1 January 2011 where the policy has been ceded to another party.
What does this mean for your current business?
Our view on the above is that given the uncertainty and the recognition by SARS and the National Treasury that there is a problem, it would be premature and not in the policyholders’ interest to make changes to key-man policies as a result of this amendment to the Income Tax Act.
Replacing a policy may be poor advice given that SARS intends to propose an alteration to the Act for policies entered into before 1 January 2011. It is still uncertain whether the new replacement policy will get the same concession.
We would like to remind you of the following:
· Altrisk is continually monitoring the above-mentioned changes and we expect positive resolution resulting in true key-man policies being unaffected.
· The discussions between SARS, ASISA and the National Treasury that will provide clarity are ongoing.
· Don't do anything different yet! It's still business as usual.
We will inform you of the actual changes, how they will affect policies and the solutions we can offer as soon as the discussions have been concluded and the interpretation of the Act is confirmed.
Bart Wouters
tel
+27 (0)11 547 7033
cell
+27 (0)83 620 7949
fax
+27 (0)86 680 5469
email
bartw@altrisk.co.za-=-
Altrisk is an authorised financial services provider (FSP 9869) and a Hollard associate company
about us
downloads & forms
contact us
Section 11(w) opinion.doc